There has been a leitmotiv recently about costs increasing in the construction industry. We have seen evidence of this with our borrowers, but regional variations for some materials and labour force availability make it difficult at this stage to discern a simple or obvious narrative or even an overall clear percentage increase. Some costs seem to be linked to short-term supply chain issues that get resolved over a reasonably short period of time whereas others are linked to more fundamental global shortcomings which will take a while to wash through. The only pattern at this point is that costs are increasing!
Slightly less visible or discussed increases in other costs such as insurances and warranties. We have seen these increase at significant levels which is catching some developers unaware and leaving them scrambling to look for cheaper alternatives or cashflow to meet them as they arise.
Where we see our borrowers doing best at controlling costs is those that anticipate and plan well ahead. The ability to secure supply and lock in costs or shopping around for the best price seems to be really helping. This requires time and access to cash flow – an area where we can sometimes help with the right preparation and information.
Right now, the residential development market is slightly protected by house prices that keep nudging upwards and continued demand for new housing stock. The risk of interest rate rises may dampen this slightly and it remains the case that looking at every aspect of the cost stack will help to protect margins.
Get those night-vision goggles on and plan ahead!
Cecile Verroest, Risk Director, BLG Development Finance
